Tax avoidance rules create more red tape for charities and trusts

Whilst you may know about FATCA, what about the Common Reporting Standard (CRS) rules which commenced on 1 January 2016?

Although charities are specifically excluded from FATCA reporting, no such exemption exists under CRS. HMRC have now published guidance for charities, so what should you be doing as a result?

What is CRS?

CRS is part of a global system for the exchange of information between tax authorities to combat tax evasion. 

Reporting institutions are required to identify reportable accounts using due diligence rules and then to report relevant information. The first reports in respect of calendar year 2016 have to be made to HMRC by 31 May 2017.

Why does it catch charities and trusts?

Under CRS if more than 50 per cent of a charity or trust’s income is: 

  • from financial assets (securities, commodities, swaps, insurance or annuity contracts and partnership interests but not direct interests in real property or cash); and
  • the assets are managed (in whole or in part) by a financial institution such as an investment manager; and
  • there are relevant account holders (beneficiaries of a trust or company shareholders).

it will be a reporting institution. 

What do I have to do?

Reporting institutions have to obtain and keep due diligence records on account holders and report payments made to tax residents outside the UK. 

Due diligence is a self-certification process (although subject to a reasonableness test) and is a two stage process. Where the account holder is UK tax resident only their name, address, jurisdictions of tax residence (UK) and entity type (for separate entities such as another charity) has to be recorded. For non UK account holders their tax identification number and for individuals their date of birth, must also be recorded.

While a trust that meets the tests outlined above will be caught and have reporting obligations a corporate charity is unlikely to make payments to shareholders and so in most cases will not have reporting obligations. The exception is where there are subsidiary charities or restricted funds constituted as separate trusts; for example prize funds, endowments etc. In such cases you will need to look at the asset allocation, income and grants of each fund as if it were a separate entity. This could mean that while the main charity has no reporting obligation the restricted fund has a report to make.

Why does it matter?

There is some catching up to do as we are already part way through the first year. This means that CRS may create a significant administrative burden for trusts and charities as they will have to carry out all of the due diligence on beneficiaries only for many to prove there are no reports to make to HMRC.

There are penalties for non-compliance but HMRC’s approach to charities and trusts will be a soft landing where efforts have been made to carry out due diligence requirements and report accurately.

Questions to ask

  • Are any of your charity’s restricted funds/endowments a separate trust?
  • Over the last three years, does more than 50 per cent of your income come from investments on a discretionary basis?

If you have answered yes to both of the questions above then you are within the rules and need to:

1. Keep due diligence records of who grants and other discretionary payments are made to; and
2. File a report with HMRC by 31 May 2017 in respect of any payments to non UK resident persons during the previous calendar year. The first report is in respect of calendar year 2016.

Please contact Nick Sladden for further information.